If the thought of researching investment options leaves you cold, there's good news.
So-called target-date funds are designed to take the stress out of investing by automatically allocating assets according to investors' ages and retirement deadlines. That means you invest and leave the work to fund managers who run these increasingly popular products.
Indeed, target-date funds are relative newcomers, with most of the 150 in the Morningstar database making their debut in the last three years. But they're already proving popular.
To date, individuals have plowed $116 billion into target-date funds, up from $26 billion in 2003, according to Morningstar. Those figures are expected to grow. A study by Hewitt Associates found that 85 percent of large employers will offer these funds in their 401(k) plans.
Their appealTarget-date funds are designed to keep investors on track to hitting retirement goals by putting more asset allocation decisions into the hands of the managers who run them. Like other mutual funds, target-date funds invest in a diverse array of stocks, bonds and cash. Many are funds of funds -- that is, they are composed of several other funds. As time passes, target-date funds automatically rebalance their holdings to become more conservative.
But convenience comes with some warning. These funds' one-size-fits-all approach is misleading since funds can differ greatly, depending on who runs them, says Paul Mladjenovic, a certified financial planner and author of "Stock Investing for Dummies."
"The mix will depend on the fund administrators. All the firms that have plans have different presumptions in place, so some are more growth oriented, some less so. When you choose a target fund, look at the categories that make up the mix for that particular fund," says Mladjenovic.
Some research still requiredFor example, let's say your target retirement date is 2020. You could buy a target fund bearing that date from numerous fund firms. T. Rowe Price and Fidelity Investments both offer funds with that target date. The Fidelity Freedom 2020 fund has 68 percent of its holdings in stocks. By comparison, 76 percent of T. Rowe Price Retirement 2020 fund is in stocks.
A target-date fund comparison
- 58% domestic stocks
- 18% foreign stocks
- 4% cash
- 54% domestic stocks
- 14% foreign stocks
- 32% bonds
Which is best? That depends on personal factors, such as your financial needs and risk tolerance, says Mladjenovic.
One place to investigate target-date funds is www.morningstar.com, where you can compare the underlying assets of the funds as well as performance history and expenses. Here again, personal advice from a financial adviser may help.
That's another way of saying that while target funds may take much of the worry off your mind, you don't get a free ride. After all, even when on autopilot, a plane needs someone to keep an eye out for the runway.